As expectations for the Fed's interest rate cut next year get stronger and stronger, the US dollar has continued to decline since September, and has now fallen to a four-month low level. The yen, the euro, and the renminbi are supported, and have been rising all the way up in the past two months.

As the US economy gradually cools down according to the expected trajectory of the Federal Reserve, the market's expectations for the Fed to cut interest rates next year have clearly risen. Many analysts believe that the bull market of the US dollar in the past few years may soon come to an end.

The market is beginning to imagine that the Fed will cut interest rates five times next year

Considering that both US CPI and PPI declined in November, compounded by a series of economic data that was weaker than market expectations, the market is increasingly convinced that the Fed has ended a year-long cycle of interest rate hikes.

According to the CME Bank's Federal Reserve Observation Tool, futures traders expect that the probability of not raising interest rates in December is as high as 97.5%, which is almost a foregone conclusion.

Traders also expect the Fed to start cutting interest rates as early as March next year. Currently, expectations for interest rate levels at the end of next year are more concentrated between 4% and 4.35%, that is, interest rate cuts of 1.25 percentage points. Each rate cut is 25 basis points, which is equivalent to cutting interest rates five times.

And within the Federal Reserve, dovish voices are getting louder and louder.

Big hawk and Federal Reserve Governor Waller said last week that if inflation continues to fall, policy interest rates can begin to be lowered. Atlanta Federal Reserve Chairman Bostic and Cleveland Federal Reserve Chairman Meester all support immobility in December; the latter is a hawkish official in the traditional sense.

Is the dollar bull market coming to an end?

Currently, in Wall Street's annual foreign exchange outlook, predictions and arguments that are bearish about the US dollar are constantly appearing.

Dutch International Group (ING) believes that the rise in the US dollar will eventually stop in 2024, and that the Federal Reserve will lower interest rates to regions with fewer restrictions in order to complete the dual mission of fighting inflation and maximizing employment.

Goldman Sachs expects that the outlook for the US dollar may be bleak next year, but a strong US economy and high yield may support it.

Richard Franulovich, head of foreign exchange strategy at Westpac Bank, recently said in an interview with foreign media that the “mini” bear trend of the US dollar is likely to continue further.

However, some analysts believe that it may still be too early to assert the end of the dollar bull market.

Asset management agency T Rowe Price pointed out that people are currently betting too much on the Fed's interest rate cut next year, and it is expected that the US growth rate and higher interest rates compared to other major economies will still support the US dollar.

Where will non-US currencies go next year?

At a time when the US dollar is faltering, the renminbi, the euro, and the Japanese yen have shown a continuous recovery in recent days.

In November, the exchange rate of the offshore renminbi against the US dollar increased by 2.70%, the exchange rate of the euro against the US dollar rose by 2.95% cumulatively, while the Japanese yen rose by 2.27%.

In the face of the Fed cutting interest rates, where will these non-US currencies go in the next year?

In Europe, although ECB President Lagarde continues to throw cold water on expectations of interest rate cuts, the money market predicts that the probability that the ECB will cut interest rates by 25 basis points in March next year is 84%, higher than the 72% forecast on Monday.

This means that if the ECB starts cutting interest rates next year, and the euro is weak relative to the US dollar or overall, weak European economic growth and geopolitical tension will also limit the euro's upward space.

In China, analysts Shao Xiang and Tao Chuan of Dongwu Securities believe that under the prospects of rising “policy bottom” attributes, deepening the imprint of “financing currency,” and weakening of the “economic stabilizer,” it is very likely that the RMB exchange rate will break 7 next year.

Let's look at Japan again. Although the economy is still in a situation of “internal and external difficulties,” the central bank's withdrawal from the negative interest rate policy seems to be a foregone conclusion.

In a report released last month, Nomura predicted that the Bank of Japan will cancel the yield curve control (YCC) policy in April next year and end negative interest rates in the third quarter.

However, at present, the market is bearish on the yen, and hedge funds increased their bearish bets on the yen last week, the highest since April 2022. The market believes that the absolute difference in yield between Japan and the US and other major economies is still very large, which is bad for the yen.

Editor/phoebe